P13–9 Degree of operating leverage Grey Products has fixed operating costs of

$380,000, variable operating costs of $16 per unit, and a selling price of $63.50 per
unit.
a. Calculate the operating breakeven point in units.
b. Calculate the firm’s EBIT at 9,000, 10,000, and 11,000 units, respectively.
c. With 10,000 units as a base, what are the percentage changes in units sold
and EBIT as sales move from the base to the other sales levels used in part
b?
d. Use the percentages computed in part c to determine the degree of operating
leverage (DOL).
e. Use the formula for degree of operating leverage to determine the DOL at
10,000 units.
Jawab
a. operating breakeven point
FC
Q=
P−VC
$ 380.000
Q=
$ 63,50−$ 16
Q = 8.000 Units

b. Calculate the firm’s EBIT at 9,000, 10,000, and 11,000 units.

Sales (in unit) 9.000 10.000
11.000

Sales Revenue $ 571.500,00 $ 635.000,00 $

698.500,00
Less : Variabel operating costs $ 144.000,00 $ 160.000,00 $
176.000,00
Les : Fixed operating costs $ 380.000,00 $ 380.000,00 $
380.000,00
EBIT $ 47.500,00 $ 95.000,00 $
142.500,00
c. With 10,000 units as a base, what are the percentage changes in units sold
and EBIT as sales move from the base to the other sales levels used in part
b?
- 10% + 10%

Sales (in unit) 9.000 10.000

11.000

Sales Revenue $ 571.500,00 $ 635.000,00 $

698.500,00
Less : Variabel operating costs $ 144.000,00 $ 160.000,00 $
176.000,00
Les : Fixed operating costs $ 380.000,00 $ 380.000,00 $
380.000,00
EBIT $ 47.500,00 $ 95.000,00 $
142.500,00

Percentage - 50% + 50%

d. Use the percentages computed in part c to determine the degree of operating

leverage (DOL).
percentages change∈ EBIT
DOL =
percentages change∈ sales
50 % −50 %
DOL = or
10 % −10 %
DOL = 5

e. Use the formula for degree of operating leverage to determine the DOL at
10,000 units.
Q x (P−VC )
DOL at 10.000 =
Q x ( P−VC ) −FC
 10.000 x (63,5−16)
DOL at 10.000 =
10.000 x ( 63,5−16 )−380.000
475.000
DOL at 10.000 =
95.000
DOL at 10.000 = 5

P13–12 Degree of financial leverage Northwestern Savings and Loan has a

current capital structure consisting of $250,000 of 16% (annual interest) debt and
2,000 shares of common stock. The firm pays taxes at the rate of 40%.
a. Using EBIT values of $80,000 and $120,000, determine the associated
earnings per share (EPS).
b. Using $80,000 of EBIT as a base, calculate the degree of financial leverage
(DFL).
c. Rework parts a and b assuming that the firm has $100,000 of 16% (annual
interest) debt and 3,000 shares of common stock.
Jawab
a. Using EBIT values of $80,000 and $120,000, determine the associated (EPS).
Earnings Per Share (EPS).
+ 50%

EBIT $ 80.000 $ 120.000

Less : Interest $ 40.000 $ 40.000
Net profit before taxes $ 40.000 $ 80.000
Less : Taxes (40%) $ 16.000 $ 32.000
Net profit after taxas $ 24.000 $ 48.000
Less : Preferred stock dividends - -
EAC $ 24.000 $ 48.000
$ 24.000 $ 48.000
Earnings Per Share (EPS). = $ 12 = $ 24
2.000 2.000

+ 100%
b. Using $80,000 of EBIT as a base, calculate the degree of financial leverage
(DFL).
Percentage change∈ EPS
DFL =
Percentage change∈ EBIT
100 %
DFL =
50 %
DFL = 2
Use formula
EBIT
DFL at $ 80.000 = 1
EBIT−I −( PD x )
1−T
$ 80.000
DFL at $ 80.000 = 1
$ 80.000−$ 40.000−(0 x )
1−0,4
$ 80.000
DFL at $ 80.000 =
$ 80.000−$ 40.000−0
DFL at $ 80.000 = 2

c. Rework parts a and b assuming that the firm has $100,000 of 16% (annual
interest) debt and 3,000 shares of common stock.
+ 50%

EBIT $ 80.000 $ 120.000

Less : Interest $ 16.000 $ 16.000
Net profit before taxes $ 64.000 $ 104.000
Less : Taxes (40%) $ 25.600 $ 41.600
Net profit after taxas $ 38.400 $ 62.400
Less : Preferred stock dividends - -
EAC $ 38.400 $ 62.400
$ 38.400 $ 62.400
Earnings Per Share (EPS). = $ 12,80 = $ 20,80
3.000 3.000

+ 62,50%
Percentage change∈ EPS
DFL =
Percentage change∈ EBIT
 62,50 %
DFL =
50 %
DFL = 1,25
Use formula
EBIT
DFL at $ 80.000 = 1
EBIT−I −( PD x )
1−T
$ 80.000
DFL at $ 80.000 = 1
$ 80.000−$ 16.000−(0 x )
1−0,4
$ 80.000
DFL at $ 80.000 =
$ 80.000−$ 16.000−0
DFL at $ 80.000 = 1,25

P13–17 Integrative—Multiple leverage measures and prediction Carolina

Fastener, Inc., makes a patented marine bulkhead latch that wholesales for $6.00.
Each latch has variable operating costs of $3.50. Fixed operating costs are $50,000
per year. The firm pays $13,000 interest and preferred dividends of $7,000 per year.
At this point, the firm is selling 30,000 latches per year and is taxed at a rate of 40%.
a. Calculate Carolina Fastener’s operating breakeven point.
b. On the basis of the firm’s current sales of 30,000 units per year and its
interest and preferred dividend costs, calculate its EBIT and earnings
available for common.
c. Calculate the firm’s degree of operating leverage (DOL).
d. Calculate the firm’s degree of financial leverage (DFL).
e. Calculate the firm’s degree of total leverage (DTL).
f. Carolina Fastener has entered into a contract to produce and sell an
additional 15,000 latches in the coming year. Use the DOL, DFL, and DTL to
predict and calculate the changes in EBIT and earnings available for common.
Check your work by a simple calculation of Carolina Fastener’s EBIT and
earnings available for common, using the basic information given.
Jawab
a. Calculate Carolina Fastener’s operating breakeven point.
 FC
Q=
P−VC
$ 50.000
Q=
$ 6,00−$ 3,50
Q = 20.000 Units

b. On the basis of the firm’s current sales of 30,000 units per year and its
interest and preferred dividend costs, calculate its EBIT and earnings
available for common.

Sales Revenue ($6 x 30.000) $ 180.000

Less : Variabel costs ($3,5 x 30.000) $ 105.000
Less : Fixed costs $ 50.000
EBIT $ 25.000
Less : Interest expense $ 13.000
EBT $ 12.000
Less : Taxes(40%) $ 4.800
Net Profit after taxes $ 7.200
Less : Preferred stock dividends $ 7.000
Earnings available for common (EAC) $ 200

c. Calculate the firm’s degree of operating leverage (DOL).

Q x ( P−VC )
DOL =
Q x ( P−VC ) −FC
 30.000 x (6−3,5)
DOL =
30.000 x ( 6−3,5 )−50.000
75.000
DOL =
25.000
DOL = 3

d. Calculate the firm’s degree of financial leverage (DFL)

EBIT
DFL = 1
EBIT−I −( PD x )
1−T
$ 25.000
DFL = 1
$ 25.000−$ 13.000−($ 7.000 x )
1−0,4
$ 25.000
DFL =
$ 25.000−$ 13.000−$ 11.666,67
$ 25.000
DFL =
$ 333,33
DFL = 75

e. Calculate the firm’s degree of total leverage (DTL).

DTL = DOL x DFL
DTL = 3 x 75
DTL = 225

15.000
f. Percentage change in sale = = 50%
30.000
percentages change∈ EBIT
DOL =
percentages change∈ sales
Percentage change in EBIT = DOL x Percentages change in sale
Percentage change in EBIT = 3 x 50%
Percentage change in EBIT = 150%
EBIT after additional 15.000 latches = $ 25.000 + ($ 25.000 x 150%)
EBIT after additional 15.000 latches = $ 25.000 + $ 37.500
EBIT after additional 15.000 latches = $ 62.500
 percentages change∈ EPS
DTL =
percentages change∈sales
Percentage change in EPS = Percentage change in earnings available for common
(EAC)
Percentage change in EAC = DTL x Percentage change in sales
Percentage change in EAC = 225 x 50%
Percentage change in EAC = 11.250%
EAC after additional 15.000 latches = $ 200 + ($ 200 x 11.250%)
EAC after additional 15.000 latches = $ 200 + $ 22.500
EAC after additional 15.000 latches = $ 22.700